Goods and Services Price Split Keeping Inflation in Check

Thursday, February 17th, 2011

News

The Wall Street Journal reports that the disparity in prices of goods and services could keep inflationary pressures down. Broadly, prices for goods and services were up 1.6 percent in the past month in comparison to the year before. However, a dichotomy has emerged between the two sectors. Goods prices were up 2.2 percent from the past year according to the Labor Department. The most notable goods in which consumers have seen price increases are common items like Starbucks coffee and gasoline that have sparked rumors about inflation being a cause for concern. However, in the service sector economists are not seeing rises in prices and actually are finding small decreases in some areas.

The causes for the contrasting trends in prices are two-fold. First, increased commodity prices internationally are driving prices higher for many basic goods. Second, the US economy is slowly recovering, and the still fragile housing market as well as the persistent high unemployment rates is holding wages in place in the service sector. Notably, according to the Labor Department’s consumer-price index, goods prices are rising at a rate faster than they were before the recession. Service prices were up 1.2 percent from a year earlier according to the Wall Street Journal.

Chairman Bernanke commented on the dichotomous direction these two sectors are taking by saying that the rising prices for gas and food will not extend into the rest of the US economy. He mentioned that the trend in rising commodity prices is affecting the entire global economy, and that the homegrown inflation in the US is extremely low. He and other analysts have all but dismissed the possibility of the U.S. to experience the extent of inflation that China, and India are now experiencing. Last year, US households spent $7 trillion on services last year making up 67 percent of total consumer spending. Fed officials are relying on this trend to hold down inflation in the near future.